Webinar Report & Playback: Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead
Webinar Launch of the Third Trade Finance in Africa Report
24 September 2020 - Making Finance Work for Africa (MFW4A), African Development Bank (AfDB) and Afreximbank hosted a joint webinar launch of the report : "Trade Finance in Africa: Trends Over the Past Decade and Opportunities Ahead". The report provides the most comprehensive research on the trade finance landscape in Africa and builds on the two previous reports released in 2014 and 2017. The report is based on a survey of over 600 unique commercial banks in 49 countries across Africa over the period of 2011-2019.
To preview a few of its findings, the report reveals that only 40% of Africa’s trade by value is bank intermediated – a far lower share than the global average of 80%. The trade finance gap (unmet demand) while falling, also remains unacceptably high. Indeed, the region’s share of the global trade finance gap is far higher than what its share of world trade would predict. The report identifies unintended regulatory bottlenecks as part of the key constraints driving these patterns.
The good news is that Development Finance Institutions (DFIs) are playing a more active role in supporting the trade finance industry in Africa. More than half of banks that engaged in trade finance activities between 2015-19 received some form of support from DFIs to expand their trade finance activities. Yet, the report also shows that DFI support is skewed towards certain sub-regions and financial intermediaries – particularly foreign-owned private banks.
The report outlines some policy recommendations to help boost trade finance supply in Africa, including but not limited to raising awareness about the impact of stringent regulatory requirements on trade finance intermediaries and addressing geographical and institutional disparities in DFI support to the sector.
The presentation of the report was followed by a panel discussion which brought together representatives of the AfDB, Afreximbank and Ecobank.
The AfDB played an important role in establishing several trade finance vehicles (i.e., Afreximbank, TDB, ATI). Following the 2008 global financial crisis and the liquidity shortages on emerging markets, the AfDB committed USD 1 billion to the global response package to address the trade finance deficit. In 2013, the AfDB established its own in-house program which has till now supported close to USD 8 billion in transactions essentially in the forms of Risk Participation Agreements (RPA) and trade finance Lines of Credit (TFLoC). Another instrument is the Soft Commodity Facility (SCF), which is currently restricted to the financing of agricultural value chains and that also offers the possibility to work directly with corporates exclusively in agricultural value chains. AfDB is also in the process of introducing a transaction guarantee scheme which will allow the Bank to perform its own due diligence and allocate the guarantee.
As part of its core activity, 60% of Afreximbank’s financing goes through financial institutions (FIs). Other products & services for corporate clients include receivable finance, contract monetization, pre-export, pre-shipment financing. Given the tendency for international banks to scale back their operations in crisis times, Afreximbank has also positioned itself as correspondent bank for African FIs providing LoC confirmation services. Guarantees can also be extended to correspondent banks willing to reduce their exposure on African FIs.
Furthermore, Afreximbank launched a number of non-lending activities such as the MANSA platform, a repository for accessing KYC information, as well as the Pan-African Payment and Settlement Systems (PAPSS) to allow counterparties in Africa to trade and settle transactions in local currencies.
Both Afreximbank and Ecobank are also striving to reach out to SMEs. Stringent KYC regulations led international banks to scale back their activities on the continent. As a result, SMEs are increasingly having trouble to process their transactions through banks. KYC requirements are burdensome for international banks leading to high transaction costs, while SMEs tend to be discriminated because banks focus on large transactions.
To that end, Ecobank called for a need to improve on processes and advocate the need for international requirements to recognize the specifics of Africa. Different public data sources could be leveraged for KYC/DD such as information from the tax administration. It is also efficient to synergize initiatives to create public registries for KYC. Ecobank is currently leveraging KYC checks by MNOs to open express accounts through its mobile app. The gender dimension and the need to support women in business is another important of aspect of trade and trade finance in Africa.
Finally, factoring is an alternative trade finance instrument and Afreximbank is considering collaboration with the Africa Trade Insurance Agency (ATI) to cover the SME’s risk. However, the lack of an appropriate legal and regulatory environment is a major impediment to the development of for factoring in Africa. Afreximbank took the initiative to develop a Model Law for factoring that relevant authorities could use as template. Furthermore, ATI could provide Forex risk coverage (convertibility risk) that will allow DFIs to do more for corporate clients.
With the on-going pandemic, the need for financing to reenergize the region’s trade is urgent. It is hoped that the findings from this latest trade finance report will bring policy makers and industry experts together to work to make trade finance more accessible to African traders. The implementation of the African Continental Free Trade Area (AfCFTA) is also expected to unlock the potential of intra African trade and massive regional trade finance opportunities.
For more details on this session’s content, the event recording is available below. The webinar presentation can also be downloaded via this link.